Target Cost

Question #3 - To implement target costing for a new product, companies often set up a cross-functional team with members from engineering, marketing, and cost accounting. Why is a cross-functional team desirable when implementing the target costing approach?

Cross-functional teams allocate expertise from various departments together for a common purpose and goal. It provides an organization with the knowledge required for an organization to achieve its objective and goals. Jiambalvo (2007) states that cross-functional teams are often employed when a company is using target costing for product development. This promotes brainstorming of thoughts and ideas conducted in the preliminary stages and structure the organization’s essential steps to product development.

Cross-functional teams can also promote and ensure effective communication is being executed. Constant discussions throughout the process development ensure that the team is accomplishing the common purpose and goal of the organization.

Jiambalvo, J. (2007). Pricing decisions, analyzing customer profitability, and activity-based pricing. Managerial Accounting (3rd ed.), Hoboken, NJ: John Wiley & Sons, Inc.

Question #5 – Explain why less profitable customers may become more profitable if a supplier switches to activity-based pricing.

Customers may become more profitable if a supplier switches to activity-based pricing, because they would be provided with the “menu” pricing approach. This provides the opportunity for less profitable customers to be able to choose the products or services that may save costs and be more beneficial for the customer. While this may initially not be in favor of the supplier, they should be able to offset costs by encouraging customers to purchase larger quantities with fewer transactions.

Jiambalvo, J. (2007). Pricing decisions, analyzing customer profitability, and activity-based pricing. Managerial Accounting (3rd ed.), Hoboken, NJ: John Wiley & Sons, Inc.

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